UPDATE 10-Oil drops as Gaza truce seen; losses pared on API data

NEW YORK, Nov 20 (Reuters) - Oil fell from a one-month high
on Tuesday amid signs of a ceasefire that would end a week of
rocket attacks and air strikes between Palestinians and
Israelis.

But losses were pared late in the session after initial
reports of an overnight truce proved premature, and weekly U.S.
oil data showed a surprisingly deep drop in gasoline and heating
fuel supplies.

Benchmark New York gasoline futures that had fallen
more than 2 percent during the day recouped nearly all those
losses after the end of open-outcry trading.

Oil prices had fallen at midday after Gaza's rulers, the
Palestinian Islamist movement Hamas, said that a truce would
start overnight, easing jitters among traders who had feared
intensifying violence could eventually draw in regional oil
superpowers who supply a third of the world's crude.

"Yesterday's big rally was all about fears of a wider
conflict stemming from Israel and Gaza, so when the truce was
announced it's not surprising we've seen prices come right off,"
said Andy Lebow, vice president at Jefferies Bache in New York.

Late on Tuesday a Hamas official said the organization did
not expect a formal ceasefire announcement until Wednesday as
Hamas was still waiting for an Israeli response to proposals.
Israeli officials continued to say that discussions were
continuing.

Meanwhile Israel pressed on with its strikes in the coastal
enclave on the seventh day of its offensive and Palestinian
rockets still flashed across the border as U.S. Secretary of
State Hillary Clinton arrived in Jerusalem. She was due to meet
Netanyahu around 11 p.m. (2100 GMT).

Brent crude fell $1.87, or 1.7 percent, to close at
$109.83 a barrel, recoiling from the 200-day moving average at
around $111.80 a barrel. By 5:15 p.m. EST it had rebounded by 60
cents, trading at $110.46 a barrel.

U.S. crude oil futures fell 2.8 percent, or $2.53 a
barrel, to settle at $86.75. U.S. stock markets were little
changed, while commodities mostly dipped.

American Petroleum Institute data released on Tuesday showed
U.S. crude oil inventories fell more than 1.9 million barrels in
the week to Nov. 16, after analysts polled by Reuters had
forecast a build of 900,000 barrels.

But the bigger surprise was in refined fuel stocks, with
U.S. gasoline inventories falling by 4.8 million barrels,
compared with expectations for a 1 million-barrel build.
Distillate inventories fell by a total of 4.4 million barrels,
API reported, three times more than forecast.

EUROPE, BERNANKE WORRIES

Concern about Europe's economy also put pressure on prices
of oil and other commodities after ratings agency Moody's
stripped France of its prized triple-A badge because of an
uncertain fiscal and economic outlook.

While word of a ceasefire helped pull down prices, Israel
pressed on with its strikes in Gaza on the seventh day of its
offensive.

Oil markets have been balancing export problems in the North
Sea and the risk of supply disruptions in the Middle East
against the struggling economy and its impact on fuel demand.

Efforts by U.S. lawmakers to try to reach a budget deal to
avoid a fiscal crisis have also grabbed the attention of traders
across equity and commodity markets over the past week, with
Federal Reserve Chairman Ben Bernanke adding to anxiety in
comments before the Economic Club of New York.

"The ability of the Fed to offset headwinds is not
infinite," he said. He predicted a "very good year" for the U.S.
economy if politicians can reach a debt deal, but added: "In the
worst-case scenario where the economy goes off the broad fiscal
cliff ... I don't think the Fed has the tools to offset that."
(Reporting by Matthew Robinson, David Sheppard and Jonathan
Leff in New York; Peg Mackey in London and Jessica Jaganathan in
Singapore; Editing by Grant McCool, David Gregorio, Bob
Burgdorfer and Jim Marshall)